The S&P 500 Index ($SPX) (SPY) on Thursday closed down -0.99%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.23%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.47%. December E-mini S&P futures (ESZ25) fell -0.95%, and December E-mini Nasdaq futures (NQZ25) fell -1.37%.
US stock indexes retreated on Thursday. The broader market was under pressure from divergent earnings results from megacap technology companies. Meta Platforms fell by more than 11% and Microsoft dropped by more than 2% after the companies failed to meet lofty expectations. However, Alphabet rose more than +2% after beating Q3 earnings estimates.
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Stocks also have some negative carryover from Wednesday when Fed Chair Powell cautioned against the assumption that the Fed will cut interest rates again in December. The 10-year T-note yield climbed to a 2.5-week high of 4.11% on Thursday, pressuring stocks.
The markets are discounting a 72% chance of another -25 bp rate cut at the next FOMC meeting on December 9-10. The markets are discounting an overall 82 bp rate cut by the end of 2026 to 3.06% from the current effective federal funds rate of 3.88%.
Stocks have support after President Trump and President Xi Jinping on Thursday agreed to extend a tariff truce, roll back export controls, and reduce other trade barriers. The US will cut fentanyl-related tariffs on Chinese goods to 10% from 20% and extend a pause on some reciprocal tariffs for an additional year, while China resumes purchases of US soybeans, sorghum, and other farm products. The agreement also includes China pausing controls on rare-earth magnets in exchange for the US rolling back an expansion of restrictions on Chinese companies.
This is a heavy earnings week, with 173 of the S&P 500 companies reporting earnings. Apple and Amazon.com report after Thursday’s close. Q3 earnings have been running strong so far. According to Bloomberg Intelligence, 84% of the S&P 500 companies that have reported so far have beaten forecasts, on course for the best quarter since 2021. However, Q3 profits are expected to have risen by +7.2% y/y, the smallest increase in two years. Also, Q3 sales growth is projected to slow to +5.9% y/y from +6.4% in Q2.
Regarding President Trump’s reciprocal tariffs, markets are looking ahead to oral arguments at the Supreme Court scheduled for November 5 on whether the tariffs are legal. Lower courts have already ruled that Mr. Trump’s reciprocal tariffs are illegal, finding they are based on a specious claim of emergency authority. If the US Supreme Court upholds those rulings and strikes down the tariffs, then the US government will have to refund the reciprocal tariffs already collected, and Mr. Trump’s power to impose tariffs will be limited to well-founded sections of US trade law. Observers expect the US Supreme Court to announce its final ruling on the reciprocal tariffs by late 2025 or early 2026.
The US government shutdown continues into its fifth week, weighing on market sentiment and the US economy. The government shutdown is delaying the release of government reports, including all the recent weekly unemployment claims reports, the September unemployment and payroll report, Aug trade balance, Sep retail sales, Sep PPI, Sep housing starts, Sep industrial production, Sep leading indicators, and others. Bloomberg Economics estimates that 640,000 federal workers will be furloughed during the shutdown, which would expand jobless claims and push the unemployment rate up to 4.7%.
Overseas stock markets settled mixed on Thursday. The Euro Stoxx 50 closed down -0.12%. China’s Shanghai Composite fell from a 10-year high and closed down -0.73%. Japan’s Nikkei Stock 225 rose to a new record high and closed up by +0.04%.
Interest Rates
December 10-year T-notes (ZNZ5) on Thursday closed down by -6.5 ticks. The 10-year T-note yield rose +1.9 bp to 4.095%. T-note prices extended Wednesday’s slide on Thursday to a 2.5-week low, and the 10-year T-note yield rose to a 2.5-week high of 4.114%. T-notes moved lower on Thursday on reduced safe-haven demand after President Trump and President Xi Jinping agreed to extend a tariff truce. Also, rising inflation expectations are bearish for T-notes, as the 10-year breakeven inflation rate climbed to a 2-week high of 2.312% on Thursday. In addition, T-notes have carryover pressure from Wednesday when Fed Chair Powell said, “A further reduction in the policy rate at the December FOMC meeting is not a foregone conclusion.”
T-note prices have continued to receive underlying support from the ongoing US government shutdown, which could lead to additional job losses, reduced consumer spending, and a weakened US economy, potentially allowing the Fed to continue cutting interest rates.
European government bond yields moved higher on Thursday. The 10-year German bund yield rose to a 2.5-week high of 2.661% and finished up +2.2 bp to 2.643%. The 10-year UK gilt yield rose +3.2 bp to 4.424%.
Eurozone Q3 GDP rose +0.2% q/q and +1.3% y/y, stronger than expectations of +0.1% q/q and +1.2% y/y.
The Eurozone Oct economic sentiment indicator rose +1.2 to a 2.5-year high of 96.8, stronger than expectations of 96.0.
German Oct CPI (EU harmonized) rose +0.3% m/m and +2.3% y/y, stronger th